I know I’ve said it before, but here it is again – the “cycle” is not an industry phenom, it is caused by the government’s intervention in interest rates. Funny how the Fed and the fiat currency were invented to “tame the business cycle” – HAH! I think it’s sad that Hartwig contrasted industry answers as to whether the cycle would ever change (“Yes or No”), and neither him, nor the industry “experts,” mentioned the Fed’s role in perpetrating the cycle. Not every major move in the Federal Funds Rate precipitates a cycle, but every cycle corresponds to a changing environment in the Federal Funds Rate. If you download some of Hartwig’s graphs on the cycle and overlay the Federal Funds Rate graph to scale, it’s plain for even an actuary to see.
Most stock companies attempt to show steady growth in revenues as this makes investors happy. They would also like to show consistent ROE, and these two goals run counter to each other, in large part thanks to the Fed’s meddling. Thus during rising rates they lower prices and reduce margins, growing the book while trying to keep ROE equivalent. During falling rates, their profits disappear and they have to increase margins, they take drastic underwriting actions to “clean up the book” and try to repair the ROE while they shrink. They chase each other’s tails and give the agents the perception of vacillation because the risks they chase today, are the risks they will purge with underwriting action a year or two from today, and vice versa.
It is interesting to note that the arguments in favour of “different this time” are just that – arguments. The “arguments” against look more like mere prejudices so perhaps we shouldn’t be too pessimistic.
Hartwig appears to be one of the more brilliant and insightful insurance commentators of our time. See him speak at The IRES FOUNDATION National Insurance School May 1-3 in San Antonio. go to http://www.ires-foundation.org/agenda.html
for more information
I have to correct myself. I just downloaded his latest powerpoint and one of the nine hypotheses listed was the interest rate and premium connection. So at least it was mentioned in the presentation, if not in the article. Interestingly, this quote appears in the III website: “The property/casualty insurance industry has exhibited cyclical behavior for many years, as far back as the 1920s.” The “Creature from Jekyll Island” was born in the 1910’s – coincidence? I think not!
I don’t know Mr. Hartwig personally but I have no doubt he’s brilliant and I have heard him speak, he’s very good, he comes across as charismatic and very intelligent with being “bookwormy.” BUT, he is in the position of an industry representative, and every once in a while, very rarely, it shows in the arguments he presents, fails to present, or dodges. He is worth going to see, if you have a chance.
heard it all before these past 30 years. god bless our free enterprise system.
Maybe we can’t count on the investment side like we used to, because of the historically low interest rates? Look at this graph.
http://research.stlouisfed.org/fred2/series/FEDFUNDS/118/Max
I know I’ve said it before, but here it is again – the “cycle” is not an industry phenom, it is caused by the government’s intervention in interest rates. Funny how the Fed and the fiat currency were invented to “tame the business cycle” – HAH! I think it’s sad that Hartwig contrasted industry answers as to whether the cycle would ever change (“Yes or No”), and neither him, nor the industry “experts,” mentioned the Fed’s role in perpetrating the cycle. Not every major move in the Federal Funds Rate precipitates a cycle, but every cycle corresponds to a changing environment in the Federal Funds Rate. If you download some of Hartwig’s graphs on the cycle and overlay the Federal Funds Rate graph to scale, it’s plain for even an actuary to see.
Most stock companies attempt to show steady growth in revenues as this makes investors happy. They would also like to show consistent ROE, and these two goals run counter to each other, in large part thanks to the Fed’s meddling. Thus during rising rates they lower prices and reduce margins, growing the book while trying to keep ROE equivalent. During falling rates, their profits disappear and they have to increase margins, they take drastic underwriting actions to “clean up the book” and try to repair the ROE while they shrink. They chase each other’s tails and give the agents the perception of vacillation because the risks they chase today, are the risks they will purge with underwriting action a year or two from today, and vice versa.
It is interesting to note that the arguments in favour of “different this time” are just that – arguments. The “arguments” against look more like mere prejudices so perhaps we shouldn’t be too pessimistic.
Hartwig appears to be one of the more brilliant and insightful insurance commentators of our time. See him speak at The IRES FOUNDATION National Insurance School May 1-3 in San Antonio. go to
http://www.ires-foundation.org/agenda.html
for more information
I have to correct myself. I just downloaded his latest powerpoint and one of the nine hypotheses listed was the interest rate and premium connection. So at least it was mentioned in the presentation, if not in the article. Interestingly, this quote appears in the III website: “The property/casualty insurance industry has exhibited cyclical behavior for many years, as far back as the 1920s.” The “Creature from Jekyll Island” was born in the 1910’s – coincidence? I think not!
I don’t know Mr. Hartwig personally but I have no doubt he’s brilliant and I have heard him speak, he’s very good, he comes across as charismatic and very intelligent with being “bookwormy.” BUT, he is in the position of an industry representative, and every once in a while, very rarely, it shows in the arguments he presents, fails to present, or dodges. He is worth going to see, if you have a chance.